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Attachment
Government Response to the Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System

Chapter 2: Trustee governance

Recommendation 2.1

The SIS Act should be amended to create a distinct new office of 'trustee director' with all statutory duties (including those which would otherwise be in the Corporations Act) to be fully set out in the SIS Act, along with re focused duties for trustees. The duties for trustee directors should include:

  1. To act solely for the benefit of members, including and in particular:
    1. to avoid putting themselves in a position where their interests conflict with members' interests;
    2. to give priority to the duty to members when that duty conflicts with the trustee director's duty to the trustee company, its shareholders or any other person;
    3. to avoid putting themselves in a position where their duty to any other person (such as another super fund or a service provider) conflicts with their duty to members;
    4. to avoid putting themselves in a position where their duty to any other person (other than members) conflicts with their duty to the trustee company;
    5. not to obtain any unauthorised benefit from the position of trustee or trustee director; and
    6. not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers.
  2. To act honestly.
  3. To exercise independent judgment.
  4. To exercise the degree of care, skill and diligence as an ordinary prudent person of business would exercise in dealing with the property of another for whom the person felt morally bound to provide.
  5. To have specific regard to (among other matters) the likely long term consequences of any decision, including the impact of the decision on the community and the environment and on the entity's reputation for high standards of conduct.

The duties for trustees should include:

  1. To keep the money and other assets of the entity separate from any money and assets, respectively:
    1. that are held by the trustee personally; or
    2. that are money or assets, as the case may be, of a standard employer sponsor or an associate of a standard employer sponsor, of the entity.
  2. To formulate and give effect to an investment strategy in respect of the fund as a whole and each investment choice option, that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
    1. the risk involved in making, holding and realising, and the likely return from, the
    2. entity's investments having regard to its objectives and its expected cash flow requirements;
    3. the composition of the entity's investments as a whole, including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification;
    4. the liquidity of the entity's investments having regard to its expected cash flow requirements;
    5. the ability of the entity to discharge its existing and prospective liabilities;
    6. the expected costs of the strategy, including those at different levels of any interposed legal structures and under a variety of market conditions; and
    7. the taxation consequences of the strategy, in light of the circumstances of the fund.
  3. To formulate and give effect to an insurance strategy which includes, but is not limited to, the types of insurance to be offered and the default minimum and permissible maximum levels of cover to be offered as well as the cost and value for money to members.
  4. If there are any reserves of the entity, to formulate and to give effect to a strategy for their prudential management, consistent with the entity’s investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due.
  5. To allow a beneficiary access to any prescribed information or any prescribed documents. To act fairly between all beneficiaries of the fund and to act impartially between beneficiaries of the same class.
  6. To act fairly between all beneficiaries of the fund and to act impartially between beneficiaries of the same class.

Government response

Support in principle

The Government notes the recommendation to establish a new office of trustee director and will consider whether the proposed arrangements achieve a more accountable and efficient trustee governance regime.

The Government supports the need for heightened trustee duties and will consult with relevant stakeholders on this recommendation.

Recommendation 2.2

Trustee directors should not be required to have specific pre-appointment skills or training. However, APRA should consider further strengthening its administration of the 'fitness' test under the SIS Act including requiring potential trustee directors to be fully briefed before accepting the position (or deciding to seek nomination, where applicable) as to their responsibilities and potential liabilities. The Code of Trustee Governance should address the on going training requirements that trustees and trustee directors must meet on an annual basis.

Government response

Support in principle

The Government supports transparency in trustee compliance with best practice governance.

Recommendation 2.3

The board of the trustee must demonstrate on an annual basis that it has the collective skill set to govern the APRA regulated fund or funds for which it is responsible and this should be one of the subjects covered in the independent annual review of the board.

Government response

Support in principle

The Government supports the need to strengthen trustee requirements and will refer the recommendation to APRA for consideration, including whether an annual review is appropriate.

Recommendation 2.4

The SIS Act should be amended so that it is no longer mandatory for trustee boards to maintain equal representation in selecting its trustee directors. The Panel expects that trustees would review and amend corporate constitutions to ensure consistency with this recommendation.

Government response

Do not support

The Government considers that the current arrangements requiring equal representation remain appropriate in ensuring members are able to participate in the management and protection of their retirement savings.

Recommendation 2.5

The SIS Act should be amended so that policy committees are no longer mandatory where the trustee board does not have equal representation.

Government response

Do not support

The Government considers that, where equal representation is not mandatory, policy committees remain an appropriate vehicle for ensuring members are able to participate in the management and protection of their retirement saving.

Recommendation 2.6

The SIS Act should be amended so that if a trustee board does not have equal representation, the trustee must have a majority of 'non associated' trustee directors (as described in chapter 2).

Government response

Do not support

The Government considers that, beyond the existing regulatory framework, the composition of a trustee board is a matter for the board to determine, but will refer to APRA the need for guidance on managing conflicts of interest.

Recommendation 2.7

For those boards that have equal representation because their company constitutions or other binding arrangements so require, the SIS Act should be amended so that no less than one third of the total number of member representative trustee directors must be non associated and no less than one third of employer representative trustee directors must be non associated.

Government response

Do not support

The Government considers that, beyond the existing regulatory framework, the composition of a trustee board is a matter for the board to determine, but will refer to APRA the need for guidance on managing conflicts of interest.

Recommendation 2.8

The Corporations Act should be amended so that any provision of a trustee company constitution that prohibits any trustee director from voting on any trustee company business (other than in the event of conflict of duty or interest) is ineffective.

Government response

Support in principle

The Government will consult with relevant stakeholders on impediments to directors voting on trust company business.

Recommendation 2.9

SIS Act section 101 should be amended to require a trustee to provide a member with reasons for its decision in relation to the member's formal complaint.

Government response

Support in principle

The Government considers it appropriate for members to receive reasons for a decision on a formal complaint and will consult with relevant stakeholders to determine how best to require reasons in a way that balances the costs with the benefits.

Recommendation 2.10

Section 197 of the Corporations Act should have no application to a director of a company to the extent that the company is acting as a trustee of an RSE and the Corporations Act should be amended accordingly.

Government response

Do not support

The Government notes the recommendation to amend the Corporations Act 2001, but sees no practical conflict arising from the interaction of the operation of section 197 of the Corporations Act 2001 and section 56 of the Superannuation Industry (Supervision) Act 1993 ('SIS Act') and will consult with relevant stakeholders for clarity.

Recommendation 2.11

All trustees should be required, as a condition of their RSE licence, to have an appropriate level of indemnity insurance cover and to provide an annual certificate of currency to APRA.

Government response

Do not support

The Government notes the recommendation to mandate indemnity insurance but considers the purchase and appropriate level of indemnity insurance to be a matter for trustees to consider as part of their risk management processes. APRA requires trustees to have a risk management strategy to deal with risks at the trustee level, including risks arising from governance and decision making.

Recommendation 2.12

The enforcement provisions of the SIS Act and the Corporations Act should be reviewed and an appropriate proportionate penalty regime should be designed to take into account the new duties imposed on trustees and trustee directors.

Government response

Noted

The Government notes the recommendation and considers it appropriate to address enforcement provisions at the time of undertaking any broader review of penalties.

Recommendation 2.13

In order for a trustee director to act as a trustee director on the board of more than one APRA regulated fund, the person and both boards need to attest to APRA that at the time of appointment there is no reasonably foreseeable conflict between the person's duty to the members of each fund and to the person's duty to each trustee company. There would be a transitional period for existing trustee directors with multiple board positions. APRA would need the appropriate regulatory tools to administer this requirement.

Government response

Noted

The Government notes the recommendation and primarily considers it a matter for individual boards to determine whether it is appropriate to have a trustee director who is also a trustee director of another APRA regulated fund, but will refer to APRA the need for guidance on managing conflicts of interest.

Recommendation 2.14

The SIS Act should be amended so as to override any provision in the governing rules of an APRA regulated fund that requires the trustee to use a specified service provider in relation to any services in respect of the fund.

Government response

Support in principle

The Government considers that trustees should be able to select service providers but will consult with relevant stakeholders on design and implementation issues.

Recommendation 2.15

A record of all gifts, emoluments and benefits (subject to an appropriate materiality threshold) provided to trustees, trustee directors and management should be kept in a register maintained by the trustee and disclosed to APRA annually as well as in the annual fund report to members and on the fund's website.

Government response

Support in principle

The Government will consult on disclosure requirements and materiality thresholds in relation to the implementation of such a gift register.

Recommendation 2.16

APRA should develop a prudential standard that sets out particular examples of conflicts of interest and conflicts of duty to illustrate behaviour that would not be allowed in relation to all APRA-regulated funds so as to ensure that trustee-directors and trustees observe their duty of loyalty to members.

Government response

Support in principle

The Government will refer the recommendation to APRA for consideration.

Recommendation 2.17

Trustees of APRA-regulated funds should, as a condition of their RSE licence, be required to articulate and follow a conflicts policy specifically tailored to their business structure that addresses all relevant issues regarding their role under the SIS Act and as a fiduciary to the members of the fund.

Government response

Support in principle

The Government will refer the recommendation to APRA for consideration.

Recommendation 2.18

An industry council (coordinated by APRA) should develop, in consultation with all stakeholders, a Code of Trustee Governance for trustees of superannuation funds and their trustee-directors to assist with identifying best practice in the industry. The Code could cover, but not be restricted to:

  1. the imposition of a higher standard of competence and a greater commitment of time from those appointed to chair a super fund board than is required of other trustee directors;
  2. board size, including whether a maximum is appropriate and any transitional period for successor fund transfers and mergers;
  3. length of time in office and retirement by rotation;
  4. development of an enhanced conflicts-handling policy, including maintenance of an affected decisions register and regular reporting to APRA;
  5. skill set for each director to demonstrate within the first 12 months of appointment;
  6. a skill matrix for the trustee board and analysis of how the current composition of the board provides the skills required under the matrix;
  7. a procedure for a rigorous and independent annual review of the performance of each trustee-director and the overall collective competence and performance of the board;
  8. gender and other diversity requirements;
  9. tendering for and benchmarking service providers; and
  10. minimum ongoing training requirements.

Government response

Support in principle

The Government supports best practice in governance and that these matters be addressed, to the extent possible, by a voluntary industry code of governance and, where appropriate, by prudential standards. The Government will consult with relevant stakeholders on design and implementation issues.

Recommendation 2.19

If industry cannot work together to establish such a council, or cannot finalise a Code of Trustee Governance within two years, then APRA should create the Code.

Government response

Support in principle

The Government supports best practice in governance and that these matters be addressed, to the extent possible, by a voluntary industry code of governance and, where appropriate, by prudential standards. The Government will consult with relevant stakeholders on design and implementation issues.

Recommendation 2.20

There should be an annual audit of the trustee's performance against the requirements of the Code of Trustee Governance and the results of that audit should be made available on the fund's website.

Government response

Support in principle

The Government supports transparency in trustee compliance with best practice governance.